Markets Still Don't Trust Europe's Greek Aid Pledge

Greek bond yields are rising again and investors now bet their money that the Greek aid package will not pass through the European Parliament. Both Germany, France and Ireland will have to vote on whether to contribute their share of the loans. If legislation fails to pass in one parliament, it could be game over for Greece, and the crisis within the euro zone would reach a whole new level.

“There are people who are willing to place their own money at risk in anticipation of this thing not going through.”

Toby Nangle


The yield on Greek two-year notes rose 66bps Wednesday, to 6.99%, after falling to record lows after the rescue package was announced. Greek 5-year CDS rose 56bp to 436bp yesterday. In the financial markets Greek bonds show that the nation may have to drain the whole international bailout package of 45 billion-euro to convince investors it can avoid a default.

The 10-year securities fell for a third day Thursday, and the yield premium investors demand to hold them instead of benchmark German bunds rose above 400 basis points for the first time since euro-region finance ministers announced the aid plan last weekend.

The parliaments of Germany, France and Ireland must vote on whether to contribute their share of the loans, government spokesmen said yesterday.

Dutch lawmakers will discuss Greek aid today, according to Bloomberg News.

“There are concerns that the money will not be available,” says Toby Nangle, who helps oversee 46 billion euros as director of asset-allocation research at Baring Investment Services Ltd. in London.

“There are people who are willing to place their own money at risk in anticipation of this thing not going through.”

“If legislation fails in one parliament you may find time is running out rather quickly,” David Schnautz, a fixed- income strategist at Commerzbank AG in London says.

“You don’t have that much time for trial and error.”

Tougher Sanctions For Deficit Countries

The European Commission is calling for “more teeth” to punish member states that violate its fiscal rules, including the possible withholding of regional development funds, the Financial Times reports.

They also seek more audit-like powers for Eurostat.

Commissioner Olli Rehn stressed that he expected to act within the current treaty arrangements, using Art. 136 of the Lisbon Treaty, with possible additional secondary legislation.

He hopes such measures would prevent future crises, but called for a “last resort” mechanism along the lines of the €30bn ($41bn, £26.5bn) rescue facility unveiled for Greece on Sunday.

But also he pours cold water on a German suggestion that habitual offenders should be expelled from the euro zone, the 16 member states that use the euro.

Such moves would be against the spirit of the E.U.’s founding fathers, he claims.

The ideas will be discussed by European finance ministers when they meet in Madrid on Friday.

The Frankfurter Allgemeine writes that member countries would have no incentives to adopt legislation that could harm them, but expects the E.U. to use the Art. 136 of the Lisbon Treaty extensively to introduce new mechanisms for the euro zone.

El Pais finds that this is another piece of evidence that the deficit hawks are gaining ground.

Attaching “Angela Bush”

In a wide-ranging interview with the Financial Times Deutschland, former IMF chief and currently PM of Luxembourg Jean-Claude Juncker’s welcomes the agreements, including Merkel’s decision to accept it, but was critical of the chancellor’s tactics, and her putting state elections ahead of the well-being of the euro zone.

He says Germany has become increasing nationalistic, and bemoaned the inability by European politicians in general to emphasize the achievements of the E.U.

Coulisses de Bruxelles, makes a note of the German sociologist Ulrich Beck’s attack on Angela Merkel in Le Monde.

In the article he criticizes her intellectual nationalism  – “Angela Bush”, as Quatremer calls her.

Beck’s point is that she has broken with a long traditional of German foreign policy.

He says Merkel was striving towards a large Switzerland, or small China, and Germany’s intellectual elites have followed her in this direction, as one could witness from the Constitutional Court’s extraordinary verdict on the Lisbon Treaty.

Unlikely To Solve Anything

Financial Times writer Daniel Gros have done the math on Greece and concludes that the EU package is unlikely to solve anything.

Refinancing needs are about €30bn p.a., but if Greece were to cut its deficit to 8% of GDP, its total financing needs add up to €50bn p.a.

Lower than market interest rates as promised by the EU/IMF aid package will not do the trick.

A 5% would only save €900m p.a., a tiny fraction of the Greek cash deficit. Even if the Germans would have accepted a 4% rate, Greece would only have saved €450m p.a. more.

The Greek problem is not one of liquidity but of insolvency. The key issue that will remain for years to come is whether Greece is willing to undertake the huge domestic effort required to achieve a sustainable fiscal position.

“The key issue that will remain for years to come is whether Greece is willing to undertake the huge domestic effort required to achieve a sustainable fiscal position. As long as doubts remain on this account, the spreads on Greek debt will remain elevated irrespective of the exact terms of international rescue packages. The fate of Greece will be decided in Athens, not in Brussels or Washington,” Mr. Gros writes.

An Illegal Subsidy?

In his Thursday column in the FT Deutschland, Wolfgang Munchau writes that there are plenty of monetary economists in Germany, but not many experts in international economics.

Adding that and none in Germany’s chancellery, as Angela Merkel has been given poor advice about sovereign solvency issues.

Her humiliating U-turn is the consequence of a misjudgment of the situation in Greece, and German policy continues to based on theological, but mostly impractical proposals.

Munchau advocates a significant policy shift, in which the E.U. is more active in supporting members in trouble, in return for a much more invasion supervision of fiscal policy.

The agreed policy is akin to trying to fix a water pipe burst with duck-tape, according to Munchau.

The German economic professor Joachim Starbatty told the Rheinische Post that he and his colleagues will challenge the Greek aid package at the German constitutional court.

They consider the package as illegal subsidy, as the interest rates are below market rates.

Related by the Econotwist:

Greece, Lehman And Geithner

Germany Forced To Accept Greek Bailout

Greece: Here’s The Deal (Well, sort of…)

Greek Crisis: Confusion And Paranoia

Euro Zone: More Fiscal Integration Or Not?

Here Comes Another Greek Bank Meltdown

“Greece Will Default”

Greek Debt Crisis Become Critical (Again)

Fitch Expects More European Sovereign Downgrades

Greek Bailout “Backstop” Confidence Trick Already Backfiring

Markets To Test Greece


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